FINANCIAL ANALYSIS AND SWOT FINDINGS RENTAL HOUSING STUDY · 2016-09-09 · August 24, 2016...

August 24, 2016

Presented by:

Kyle Talente, RKG Associates, Inc.

Dr. Lisa Sturtevant, Lisa Sturtevant & Associates, LLC

FINANCIAL ANALYSIS

AND SWOT FINDINGS

RENTAL HOUSING STUDY

Montgomery County, Maryland

Draft for Discussion Presented to the Rental Housing Market Study Advisory Committee on August 24, 2016

PROJECT OVERVIEW

•Identify Data Needs

•Identify Key Stakeholders

•Review Background Materials

Task 1: Project Kickoff/ Data Collection

•Focus Groups and Stakeholder Interviews

•Neighborhood Assessment

•Local and State Policy Analysis

•Best Practices Analysis

Task 2: Secondary Analysis

•Identify Options

•Financial Feasibility Model

•Cost/Benefit AssessmentTask 3: Narrow Options

•Develop Recommendations

•Draft Final Report

•Meet with Advisory Committee, Planning Board, County Executive and County Council

Task 4: Recommendations


SWOT Analysis

Market

Policy

Capacity

Key Policy Considerations

Produce New Housing

Preserve Existing Housing

Generate Resources

Financial Analysis

Methodology

Results

Implications

PRESENTATION OVERVIEW


SWOT ANALYSIS


Market

Local and regional market demand strong at all incomes

Data indicate households continue to seek MC opportunities

Most profitable along Metro, Purple line, and within ICC

Best serving 60% to 80% right now

Certain areas have broader appeal

Metro corridors, inner subareas, well regarded elementary schools

Also tied to available amenities

Substantial supply of traditional ownership (single-family) units

augments rental market (large units)

STRENGTHS


Policy

MPDU program very effective at delivering units

Focused in the 50% to 70% range only

MPDU program has distributed the price controlled housing

throughout the County

CR zoning has a reward system for additional MPDU production

Right of first refusal program for sale of multifamily developments

Code enforcement responsive in addressing resident concerns

Housing trust fund (HIF) to incent price appropriate housing

Use of County-owned land to develop income controlled housing

Co-location

STRENGTHS


Capacity

Leadership proactively seeking to enhance price appropriate rental

housing

Elected officials, planning board, advocates

HOC is a stable, well positioned implementation partner

DHCA helpful and proactive in going through the MPDU approval

process

Still has many requirements to be met

Committed, experienced non-profit affordable housing

development partners in the region

STRENGTHS


Market

Imbalance of supply and demand pushing rents higher

Continued increase in rents

Not enough rental housing for households earning less than $50,000

Many of the more cost effective areas do not have the amenities or

transportation support demanded

Limited land availability for development

Redevelopment costly

Placing developable parcels in to Ag Reserve reduces supply

In older buildings, renovation costs start to be comparable to

redevelopment

Building efficiency/competitiveness

WEAKNESSES


Market (cont.)

Not enough large 3+ bedroom large unit housing to accommodate

families

Not enough housing built to accommodate special needs persons

Physical/mental disabilities

Homeless/transitioning households

Not enough on-site services at existing facilities

WEAKNESSES


Policy

CR Zoning includes affordable housing in menu of benefits – but developers not required to choose that benefit

More cost effective to avoid housing option

Lack of flexibility in MPDU program delivery (e.g., limited off -site units)

Housing one of several priorities in Montgomery County

County policies focused on regulating to stop something, not encourage something

Certain County spending priorities determined ad hoc (HIF)

Can change with staffing change/political will

The time from project initiation to opening can take too long

Entitlement risk; construction risk; market risk

County impact fees/taxes on new development onerous to providing affordable housing

WEAKNESSES


Policy (cont.)

There is a perception that approval process/requirements are

inconsistent and inconsistently applied

Unpredictability = cost

Process needs to be constantly improved to be as consistent and

predictable as possible

Timeline for approvals is perceived as too long

Similar to other DMV communities

Montgomery County non-competitive with other regions in state

for LIHTC funds

Entrenched position to “keep doing things the same way”

WEAKNESSES


Capacity

Not enough money/resources being put to meet local needs

(region-wide)

Cost of development is a barrier to entry for smaller developers

Limited number of affordable housing developers to partner with

WEAKNESSES


Market

Tap into the value of ‘excess’ public land

Right of way land not needed for transportation projects

Co-locating public services with rental housing development

Preservation of existing units is more cost effective in certain

markets

Preservation does not necessarily mean keep the exact unit

Incentivize redevelopment that keeps same number of affordable units

or total bedroom count

Retrofit older commercial corridors with mixed use development

Recapture development potential of parking fields

Metro areas in particular

Use of micro units in transit areas

OPPORTUNITIES


Policy

Flexibility in meeting County MPDU requirements

Provide lower MPDU percentage for units meeting lower income targets

Make MPDU requirement on square footage rather than unit count

Allow for off-site unit delivery

Create distance requirement for proximity

Payment in lieu of units

Has to be at market rate value, though

Increase density and height allowances in certain areas to enable additional supply

Increase use (funding) of right of first refusal

Tier priority for preservation based on set of criteria

Serve vulnerable populations?

Already receive Federal funding?

OPPORTUNITIES


Policy (cont.)

Use public land for price appropriate housing development

Ag Reserve property swaps

Continue to work towards creating more predictable and efficient

development approval process

Metric-based requirements

Administrative approvals for smaller projects

Modify waiver of impact fees for more MPDUs

Adjustment of % requirement

Same flexibility in terms of income target

Create County voucher program to augment Federal program

Lobby state government to allocate LIHTC pool for Montgomery

and Prince George’s County

OPPORTUNITIES


Policy (cont.)

Tie access to certain funds for development/rehabilitation that

incorporates accessible units

OPPORTUNITIES


Capacity

Increase investment in Housing Investment Fund

Mandate HIF for construction/preservation only

Require HIF contribution for commercial/residential projects

Regional housing program to attract Federal/foundation support

Local communities control their own money

OPPORTUNITIES


Market

Portion of resident base that opposes multifamily and/or increased

density development

Locating new developments away from services and transportation

access (value to lower-income HHs)

Purple Line displacement as redevelopment/rent increases occur

Redevelopment of existing market rate affordable properties will

reduce 3+ bedroom supply

Unless policy change in delivery of MPDU units

Reversion of rented single family units back into ownership will

impact supply-demand balance

Displacement of communities (particularly ethnic communities)

that disrupt social networks

THREATS


Market (cont.)

Key renter market segments have different needs

County demographics are changing

Housing affordability challenges include credit worthiness, not just

income

Senior households with disabled adult children at risk

Caretakers for both

Transportation accessibility for extremely low income and disabled

persons

THREATS


Policy

Off-site/in lieu development is counter to County’s history of

prioritizing mixed-income developments

Increasing inclusionary zoning requirement without offsetting

benefits could chill market

Using blanket policies may not be the most effective way to

develop/preserve housing

Should be done on case-by-case basis

Placing redevelopment restrictions on existing market rate

affordable properties disproportionately impacts owners

Have to balance tax burden on residents with investments in

programs such as housing trust fund

THREATS


Capacity

Lack of increase in financial funding will limit effectiveness

Equity investors only interested in “A” rental developments

Hard to get funding for secondary/tertiary locations

THREATS


KEY POLICY

CONSIDERATIONS


Successful local housing strategies are:

Comprehensive

Flexible

Responsive to local needs

Consistent with community goals

Greatest needs among lowest income households,

larger households

Financial resources are key but land use/zoning

policies are also essential

Changing needs means it’s necessary to revise

longstanding policies

KEY POLICY CONSIDERATIONS


COMPREHENSIVE STRATEGY

Generate

Resources

Produce New

Housing

Preserve

Existing

Housing


POLICY OPPORTUNITIES FROM REVIEW

OF BEST PRACTICES

PRODUCE NEW HOUSING

Add flexibility to the MPDU program

Varying income targets and affordability requirements

Include an off-site and/or in lieu option

Key issues

Consistency with County’s mission/goals

Appropriateness in different markets

Getting the parameters right both to serve households in needs and

to avoid stalling housing activity



OF BEST PRACTICES

PRODUCE NEW HOUSING

Increase use of density averaging and density

transfers

Expand public land program

Other potential smaller-impact interventions

ADUs

Development review process

Parking requirements



OF BEST PRACTICES

PRESERVE EXISTING HOUSING

Key Issues

Make use of existing programs (e.g. Right of First Refusal)

Resources (see below)

Carrot and stick approaches

Tax exemption abatement

Demolition tax

Plan for preservation as part of redevelopment



OF BEST PRACTICES

GENERATE RESOURCES

Expand access to tax credits

Need to work at the state level

Other Key Issues

Possible to expand sources of revenue for affordable housing

Commercial linkage fee, demolition tax, TIFs, developer fees

Assess who pays/what impact/political will


FINANCIAL ANALYSIS


Built to accomplish two primary tasks

Assess the value impact on units by changing AMI target

Difference of value for property owner

Analyze the proforma impacts of adjusting MDPU requirements

How do policy changes impact development potential?

Assumptions broken down based on availability

Subarea level (i.e. rents)

County level (i.e. interest rates)

Regional level (i.e. construction costs)

Proforma piece not complete yet

Waiting on additional market data from local operators/developers

Should be ready for September meeting

FINANCIAL MODEL


Measured the capitalized value of affordable units

against a similar market rate unit

Same market subarea

Same building type

Same bedroom count

Used market data to determine thresholds

Rent – 2014 Rent survey

Vacancy and collection loss (VACL) – REIS

Operating expenses – REIS

Cap rates – REIS, Capital One

Will refine results based on feedback from

development/operator community

VALUE IMPACT METHODOLOGY


The model is interactive, allowing customized

parameters for various locations and types

The model’s inputs are unique to those parameters

METHODLOGY

SUBAREA BUILDING MATERIAL

TYPE OF HOUSING INTERIOR FIT OUT

AGE OF HOUSING PARKING


Every variable can be

customized based on specific

input requirements

Allows user to assess very

specific projects with real-

time, specific pro forma and

cost impact results

METHODOLOGY


Some performance metrics do not change with

income limits

Vacancy and collection loss percentage

Operating expenses

Cap rate

Units operate with same costs to the developer

Construction

Operating expenses (set to market rate units)

Areas with no typology representation used

Countywide average

Variable override built into the model to customize as necessary

ASSUMPTIONS


New construct ion high r i se in Fr iendship Heights /Bethesda/White Fl int subarea

CAPITALIZED VALUE MATH

ONE BEDROOM RENTAL CALCULATIONS

30% of AMI 50% of AMI 65% of AMI 80% of AMI 100% of AMI Market Rate

PGI $7,716 $12,840 $16,692 $20,544 $25,680 $29,805

VACL $293 $488 $634 $781 $976 $1,133

OI $0 $0 $0 $0 $0 $0

EGI $7,423 $12,352 $16,058 $19,763 $24,704 $28,672

OE $11,784 $11,784 $11,784 $11,784 $11,784 $11,784

NOI ($4,361) $568 $4,273 $7,979 $12,920 $16,888

NOI/Unit ($4,361) $568 $4,273 $7,979 $12,920 $16,888

Unit Value ($87,229) $11,357 $85,470 $159,582 $258,399 $337,757

Value PSF ($159) $21 $155 $290 $470 $614

TWO BEDROOM RENTAL CALCULATIONS

30% of AMI 50% of AMI 65% of AMI 80% of AMI 100% of AMI Market Rate

PGI $8,676 $14,448 $18,780 $23,117 $28,896 $38,653

VACL $330 $549 $714 $878 $1,098 $1,469

OI $0 $0 $0 $0 $0 $0

EGI $8,346 $13,899 $18,066 $22,238 $27,798 $37,184

OE $15,283 $15,283 $15,283 $15,283 $15,283 $15,283

NOI ($6,936) ($1,384) $2,784 $6,956 $12,515 $21,901

NOI/Unit ($6,936) ($1,384) $2,784 $6,956 $12,515 $21,901

Unit Value ($138,724) ($27,671) $55,677 $139,117 $250,309 $438,025

Value PSF ($252) ($50) $101 $253 $455 $796


NEW CONSTRUCTION, GARDEN

UNIT SIZE 30% of AMI 50% of AMI 60% of AMI 65% of AMI 80% of AMI 100% of AMI

Efficiency ($159,700) ($73,500) ($30,400) ($8,700) $27,500 $77,000

One Bedroom ($225,300) ($126,700) ($77,300) ($52,600) $6,200 $62,800

Two Bedrooms ($272,600) ($161,600) ($105,900) ($78,200) ($4,100) $59,500

Three Bedrooms ($342,900) ($219,400) ($157,700) ($127,800) ($34,200) $42,600


Efficiency ($251,400) ($165,300) ($122,100) ($100,400) ($35,600) $22,900

One Bedroom ($328,500) ($229,900) ($180,500) ($155,800) ($81,600) $2,100

Two Bedrooms ($424,000) ($313,000) ($257,400) ($229,600) ($146,200) ($35,000)

Three Bedrooms ($458,200) ($344,700) ($273,100) ($242,100) ($149,500) ($26,000)

ROUTE 29 CORRIDOR EAST

FRIENDSHIP HEIGHTS/BETHESDA/WHITE FLINT


NEW CONSTRUCTION, HIGH RISE


Efficiency ($220,700) ($134,600) ($91,400) ($69,700) ($5,000) $41,000

One Bedroom ($280,300) ($182,300) ($132,800) ($108,100) ($34,000) $30,100

Two Bedrooms ($331,900) ($220,900) ($165,200) ($137,500) ($54,100) $24,600

Three Bedrooms ($390,100) ($266,600) ($205,000) ($174,000) ($81,400) $14,800


Efficiency ($352,600) ($266,500) ($223,300) ($201,600) ($136,800) ($50,400)

One Bedroom ($425,000) ($326,400) ($277,000) ($252,300) ($178,200) ($79,400)

Two Bedrooms ($576,700) ($465,700) ($410,100) ($382,300) ($298,900) ($187,700)

Three Bedrooms ($900,200) ($776,700) ($715,000) ($684,100) ($591,500) ($468,000)

ROUTE 29 CORRIDOR EAST

FRIENDSHIP HEIGHTS/BETHESDA/WHITE FLINT


Subarea, development type and bedroom count each

influence the potential cost of affordability

IMPLICATIONS

VALUE DIFFERENTIAL BETWEEN MARKET AND MPDU

Efficiency 1-Bedroom 2-Bedroom 3-Bedroom

Garden, Low End ($8,700) ($52,600) ($78,200) ($126,800)

Garden, High End ($100,400) ($155,800) ($229,600) ($242,100)

High Rise, Low End ($69,700) ($108,100) ($137,500) ($174,000)

High Rise, High End ($201,600) ($252,300) ($382,300) ($684,100)


Location has the greatest impact on value differential

Highest along Metro Corridors and inside the ICC

Where demand is the greatest

Lower affordability level = larger value loss

$150,000 to $230,000 per unit for 30% of AMI (from MPDU)

Gap for garden apartments lower due to lower rent

threshold numbers

Owners in certain parts of the market not interested in selling to

garden density since land price is based on total unit count

Capitalizing on higher development densities

Denying density likely will result in suppressing development or

encouraging move to low density ownership housing

IMPLICATIONS


Attaining deeper subsidies in high cost areas requires

less tradeoff of units

Value loss the same in all areas due to the fixed price

However, amount of value loss from market varies

$70,000 in Route 29; $202,000 in FH/B/WF

So, trade off from 65% to 30% is 3:1 in Route 29; 2:1 in FH/B/WF

Actual trade-off varies by subarea, development type

Type of development impacts the tradeoff ratio

High rise vs garden…

It is better to buy-down cost in some areas and trade

unit totals in others

IMPLICATIONS


Net Present Value of 1-Bedroom Unit in a new

construction high rise within FH/B/WF (10% return)

$28,700 at market rate rent

($92,800) at MPDU level

($175,900) at 30% of AMI

How do we pay for 12.5% 1-bedroom units at 30% of

AMI in a high rise in the FH/B/WF subarea?

36.5% additional market rate units (density bonus)

33% reduction in impact fees for project

$83,000 cash payment FOR EACH UNIT at approval

Reduce MPDU requirement from 12.5% to 7.5%

SO WHAT?

Rehabilitation costs are harder to project

Costs are variable based on property condition/need

Costs reported to vary from $50 to $100+ per square foot

Can range from $30,000 to $125,000 per unit

**Waiting on AOBA data to have more solid numbers

However, cost per unit for preservation substantially

lower than new construction

Rents naturally tend lower for older properties

If acquisition is necessary

Rehabilitation costs less than new construction costs

When acquisition not necessary

Better “deal” in higher-cost areas (i.e. Metro corridors)

REHABILITATION


NEXT STEPS


FINANCIAL ANALYSIS AND SWOT FINDINGS RENTAL HOUSING STUDY · 2016-09-09 · August 24, 2016...

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Transcript of FINANCIAL ANALYSIS AND SWOT FINDINGS RENTAL HOUSING STUDY · 2016-09-09 · August 24, 2016...